Investment Activity Eases From 2007 Peaks, Though Core Investors Remain Active by CB Richard Ellis

(2008-06-29) Josephine Ng

Details on investment activity and transactions for the first half of 2008 throughout Asia are now available, with mixed results. Demand has slowed from last year, but is still strong with core investors.

Hong Kong (Netsweets) June 29, 2008 -- CB Richard Ellis has released investment activity data for the Asian region for the first half of 2008.

The first half of 2008 was characterised by uncertainty regarding the global economic climate resulting from the global credit crisis, volatile capital markets and slowing global economy. Though highly leveraged investors have largely stepped out of the region’s investment markets due to the continued credit squeeze, core and core-plus investors remained active in many markets.



On the back of the region’s sound economic fundamentals and positive long-term outlook, as well as reasonably balanced supply-demand dynamics in many commercial property markets, financially-sound investors remained generally positive on the outlook for the investment market, though in certain markets some have adopted a “wait-and-see� approach. As a result, the atmosphere was quite mixed in Asia’s major property markets, and investment activity in certain cities therefore eased from the peaks recorded in 2007, although the volume of investment activity still remained considerable.



Major Asian cities remained the focus of investor interest in the first quarter of 2008 on the back of the upbeat office market, where limited supply again exerted upward pressure on rentals. Prime office properties continued to be highly sought after by investors, with both REITs and institutional investors making notable acquisitions, including the majority of the quarter’s ten largest investment deals. The combined value of the ten largest transactions was US$8.6 billion, with Mitsubishi Real Estate topping the list with its acquisition of the Resona Maruha Building in Tokyo for over JPY 162 billion.



Singapore’s investment market remained active, despite wider uncertainty arising from the instability of global financial markets. A total of S$8.50 billion worth of investment transactions were recorded over the first quarter. Property market investment activity was underpinned by Singapore’s positive longer-term outlook despite the uncertainty of the global economic environment. Also, Singapore’s position as a financial hub and popular location for MNCs, as well the reasonable CB Richard Ellis Press Release May 5 Page 2 equilibrium in supply-demand dynamics of the office market, are expected to sustain a healthy level of investment activity.



In Hong Kong, local investors were somewhat less aggressive in acquiring investment properties in the first quarter due to the prolonged stock market volatility. Notwithstanding the slight lull, the negative real interest rate environment and intact long-term trends are expected to prompt a renewed round of activity from financially sound investors, though more heavily leveraged players will be more likely to face increasing constraints. A noteworthy transaction in the quarter was Champion REIT’s acquisition of the retail, car park and certain office portions of Langham Place in Mong Kok for a total consideration of HK$12.5 billion. The seller was the REIT’s largest shareholder, Great Eagle.



While investor appetite for assets in Japan has not diminished, some lenders are exercising caution and many opportunistic funds have removed themselves from the market. Prices for smaller, less well located assets have also softened. However core and core plus funds targeting good quality, well located properties and financing at loan-to-value ratios of circa 50% continued to raise debt without much difficulty, and prices for the best quality assets therefore remained firm.



Overseas investors remained keen on acquiring investment properties in China, in spite of the increasing restrictions imposed on the entry of foreign capital. Properties with offshore equity structures therefore have a significant advantage in the market as they enable investors to avoid time-consuming onshore approval procedures. In Shanghai, South Korea’s Mirae Asset acquired the Shama Luxe at Xintiandi from Gateway Capital for an undisclosed amount. The tightened credit conditions in the real estate industry and restrictions on the entry of foreign capital have led some local developers to seek alternative financing from international institutions, resulting in alliances such as those between Forte and SEB and Gemdale with UBS; as well as an increase in M&A activity among local companies, especially amongst larger developers seeking to acquire smaller developers with attractively valued development land reserves.



Taiwan’s real estate investment market showed signs of growing buoyancy, as evidenced by steady appreciation in the capital value of commercial properties and rising transaction volumes. This was especially evident in the residential and commercial sectors, with market sentiment having improved markedly on the back of optimism surrounding the anticipated introduction of closer economic, transport and tourism ties with mainland China under the new KMT-backed government. Taiwan’s more positive economic outlook has also prompted more overseas investors to begin looking for real estate opportunities in the territory.



Following the surge in activity in 2007, investment activity in Seoul saw a slight reduction in intensity and a shift in focus. Investor appetite for office properties remained undiminished, but the steep rise in office capital values has created CB Richard Ellis Press Release May 5 Page 3 wide gaps in expectations between sellers and potential buyers, and none of the buildings offered for sale were transacted. Investors therefore diversified their investment strategies with respect to area and sector, seeking office development opportunities as well as retail and industrial properties.



The Kuala Lumpur investment market was relatively subdued during the period under review following the flurry of transactions in the fourth quarter of 2007. The office sector continued to dominate investment activity and Kuwait Finance House was again active in the office market, acquiring the Menara YNH after being involved in the transaction of three office buildings in the fourth quarter of 2007.



In India, investor sentiment remained cautious and selective, with optimism about long-term prospects but expectations of some volatility and consolidation over the short-term. Another significant event for the market was the issuance of the draft guidelines by the Securities and Exchange Board of India regarding Real Estate Mutual Funds (REMFs).



In New Delhi, certain sub-market locations such as Noida have witnessed volatility in both capital and rental values on account of oversupply, primarily for IT/ITeS space. However Noida witnessed one of the quarter’s most notable transactions, the Noida Authority auction of a 95-acre commercial land parcel that fetched a price of over INR 50 billion (US$1.25 billion). There has also been an increased focus on development of industrial, infrastructure and warehousing projects.



Check the pulse of the Hong Kong real estate market with CB Richard Ellis (Asia) at http://www.cbre.com.hk.